Some of you will be getting information from your employer about open enrollment options for your health care in the upcoming weeks.
Don’t just brush this paperwork aside or breeze through it! There is important information in those documents that can save you money. This is the time of year where you will determine if (and how much) you will contribute to a flexible spending account (FSA).
If you don’t know how an FSA works, it’s simple: You can set aside a portion of your earnings using pre-tax dollars to use for certain health care expenses such as clinic co-pays, prescriptions, and deductibles. You can also set up an FSA for childcare and certain elder care expenses.
An FSA can help you lower your tax bill – which is the main draw for most people. Another perk is that it forces you to save for medical and childcare expenses, which is something that many people don’t think about until the bills roll in. Most healthcare FSAs use debit cards, which also means you don’t have to worry about paying for co-pays or prescriptions out of pocket when you’re sick or hurting.
Of course, with all that convenience there are a few downsides. You must spend the balance you’ve set aside in your FSA account by the end of the year or you will lose that money. And depending on how your plan works, you may need to either fill out paperwork to be reimbursed for your expenses or submit your medical receipts for review. Regardless of your plan, you must keep all of your receipts for claims you make against your FSA in case you are ever audited.
To determine how much to set aside, first figure out how much money you’ll need to meet your health insurance deductibles. Then figure out how much you spend annually on your regular prescriptions. Next, estimate (using last year’s experience) how many visits your family will make to the doctor and calculate how much you would spend in clinic visit co-pays. Finally, consider any extra expenses like new eyeglasses or dental work that could be paid for with pre-tax dollars through your FSA.
If you’re planning to set up a dependent care flexible spending account, you’ll need to figure out how much you spend annually on childcare or elder care services.
Add up these figures and then divide them by the number of paydays you receive in a year. That will be the dollar amount taken out of each paycheck and placed in your FSA.
This flexible spending account calculator can show you the potential tax savings of putting money in a flexible spending account. Your human resources department where you work may also have a similar calculator. I estimate that an FSA saves our family at least $500 annually – well worth doing, in my opinion.
If you’re worried about not being able to spend it all before the year is up, then set your FSA for a slightly lower amount and know that you’ll have to pay whatever is not covered by the FSA. You can adjust the amount you put in your FSA each year during the open enrollment period at your workplace.
The flexibility of an FSA makes it worth doing, especially if you’re looking to save money and be more disciplined about planning for healthcare and childcare expenses. Be sure to check with your employer during the open enrollment period to find out all the details on your individual plan options. It’s also a good time to review all of your health insurance plan options.
Your turn: Do you use an FSA? Why or why not?